51 - 2020 Reflections on Crypto and Beyond | Vitalik Buterin

🚀 SUBSCRIBE TO NEWSLETTER: http://bankless.substack.com/​ ✊ STARTING GUIDE BANKLESS: https://bit.ly/37Q17uI​ https://bit.ly/37Q17uI%E2%80%8B 🎙️ SUBSCRIBE TO PODCAST: http://podcast.banklesshq.com/​ 👕 BUY BANKLESS TEE: https://merch.banklesshq.com/​ https://merch.banklesshq.com/%E2%80%8B ----- 💪BECOME A BANKLESS PREMIUM MEMBER: http://bankless.cc/membership​ http://bankless.cc/membership%E2%80%8B ----- GO BANKLESS WITH THESE SPONSOR TOOLS: ⭐️ AAVE - BORROW OR LEND YOUR ASSETS https://bankless.cc/aave​ https://bankless.cc/aave%E2%80%8B 🚀 GEMINI - MOST TRUSTED EXCHANGE AND ONRAMP https://bankless.cc/go-gemini​ https://bankless.cc/go-gemini%E2%80%8B 💳 MONOLITH - GET THE HOLY GRAIL OF BANKLESS VISA CARDS https://bankless.cc/monolith​ https://bankless.cc/monolith%E2%80%8B 📈 KWENTA - DERIVATIVES TRADING WITH INFINITE LIQUIDITY https://bankless.cc/kwenta​ https://bankless.cc/kwenta%E2%80%8B ------ 51 - 2020 Reflections on Crypto and Beyond Guest: Vitalik Buterin We bring on Vitalik to digest the third of his recent posts on his website: Endnotes on 2020: Crypto and Beyond https://vitalik.ca/general/2020/12/28/endnotes.html Vitalik wrote this post from Singapore, noting that 2020 was an extremely interesting year in which we faced “humanity’s first boss-level enemy since 1945.” However, it was also a year that brought much hope in areas like transportation, medicine, AI, and blockchains. We have observed a transition in the Political economy from physical to digital – 2020 served as a high-octane accelerant for these changes. A key piece of this change is shifting emphasis from physical private goods to digital public goods. This transition requires creative solutions to the challenges of effective governance. The phrase “digital nationalism” refers humanity’s recent tendency to polarize and how this extends to the internet. Both Bitcoin and Ethereum have undergone great schisms, resulting in hard forks like BCH and ETC. These phenomena in the rising political economy will likely continue. Vitalik walks through the tricky relationship between our financial and non-monetary social motivations. Culture and narrative can be incredibly powerful tools for innovation, but altruistic people are not the only ones with access to these things. Vitalik concludes with thoughts on the Big X - Big Government, Big Business, Big Tech, etc. This multidisciplinary “dense jungle” is populated by a variety of powerful groups with dynamic interrelationships, and blockchains & cryptocurrencies are set up to play a vital role. ------ Vitalik's Blog: https://vitalik.ca/ Vitalik on Twitter: https://twitter.com/VitalikButerin ------ Don't stop at the video! Subscribe to the Bankless newsletter program http://bankless.substack.com/​ http://bankless.substack.com/%E2%80%8B Visit the official Bankless website http://banklesshq.com/​ http://banklesshq.com/%E2%80%8B Follow Bankless on Twitter https://twitter.com/BanklessHQ​ https://twitter.com/BanklessHQ%E2%80%8B Follow Ryan on Twitter https://twitter.com/ryansadams​ https://twitter.com/ryansadams%E2%80%8B Follow David on Twitter https://twitter.com/TrustlessState​ https://twitter.com/TrustlessState%E2%80%8B ----- Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time we may add links in this channel to products we use. We may receive commission if you make a purchase through one of these links. We'll always disclose when this is the case.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:06Ryan Sean Adams?

  Welcome to Bankless, where we explore the frontier of internet money and internet finance. This is how to get started, how to get better, and how to front run the opportunity. I'm Ryan Sean Adams. I'm here with David Hoffman, and we're here to help you become more bankless. David, we have Vitalik on once again. What topics do we cover?

• 0:27David Hoffman?

  Yeah, we cover three of his most recent blogs on his vitalik.ca blog. These are all fantastic reads. And in order to help amplify Vitalik's message and try and get out what he's trying to get out, we go through each of these blog pieces together. We start with his recap of 2020 and his forward looking, kind of his forward looking predictions into 2021. That blog was particularly interesting. That's how we start the conversation. We move into his blog post called "An Incomplete Guide to Rollups," and he kind of helps us unpack what it is to be a rollup, how we, as an Ethereum L2 scaling community, landed on rollups as a construction, and why they are so powerful. And then we also get into the

• 1:11David Hoffman?

  topic of a social recovery wallet. So these are all relatively three different topics, but I would say they are all forward looking topics that Vitalik sees as kind of like the logical conclusion of a lot of different forces, perhaps maybe a lot of them social, a lot of them political in his first, in his first blog post that we get into. But then the second two are more technological and about the way that Ethereum, the landscape is going to manifest and mature over time. So again, a wide ranging conversation, but still with a lot of awesome through lines.

• 1:43Ryan Sean Adams?

  Absolutely. If you're listening on the podcast, of course, we have this on YouTube as well, where we actually go through the articles visually. If you're watching this on YouTube, you can check it out on the podcast and get it directly into your ears. Make it more portable that way. David, we should just get right into the interview. But before we do, guys, we want to talk about the sponsors that made this episode possible.

• 2:08David Hoffman?

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• 2:50David Hoffman?

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• 3:34David Hoffman?

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• 4:18David Hoffman?

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• 4:33Ryan Sean Adams?

  Okay, Bankless Nation, we have Vitalik Buterin with us once again. Who needs no introduction to Bankless. Vitalik, how are you doing today?

• 4:43Speaker 02

  I'm great, Tim. How are you?

• 4:44Ryan Sean Adams?

  I'm doing great. Good morning to you, sir. You know, we wanted to talk about three of the recent articles you put out, and I think the one to start with, maybe the one you kind of bookmarked on the end of 2020. 2020 was a crazy year. At least for me, it did not start in the, it did not go the way I had thought it would go. And I think that's probably true for, for a lot of people. So let's start with that article. We're also going to talk about your Rollups article and then Social Recovery after that. But let's talk about 2020. Why was it such a strange year?

• 5:26Speaker 02

  Lots of things were strange. I mean, first of all, you know, the virus was strange. Then, and politics in a lot of countries were strange. Life moved on to the internet very quickly, and that made things that were already strange even more strange. So, I mean, first of all, just a whole bunch of things happened at the same time. But also, I think, in addition to some of the things that we saw that were in a fairly exclusive 2020, it was also this year that I think really accelerated a lot of the trends that we've seen just already moving pretty quickly over the last couple of decades, right?

• 6:09Speaker 02

  So, some of the more important ones that I talk about, I mean, one of them is just the internet becoming this much more important and a quickly primary force in our lives. And I know you had Balaji on your podcast earlier, and he talks about like the primary and the mirror. And this was kind of the flipping where the internet became the primary. And I think that was completely true. But I also think it's important to really think through some of the consequences of what that being true means. Because, for a long time, you know, people have talked about things like post scarcity economics and zero marginal costs.

• 6:52Speaker 02

  You know, what a world where most value is virtual and most things people care about are virtual actually means. But Think the effects actually are profound, right? And you don't, I think, kind of appropriately realize kind of just how much needs to be rethought until you actually experience it. And so, and I've been, I, like, I highlighted a couple of things, like, I, yeah, and I've talked about how important public goods are on the internet. For example, I talked about how important, even just like the different ways in which economics applies.

• 7:36Speaker 02

  So, like, basically, the, the, the challenge with kind of online activity generally, right, is that, like, it's just much more difficult to formalize kind of things that are going on, right? Like, because in the physical world, like, we've done this, kind of fairly thorough job of kind of formalizing, you know, this is a transaction, this is a trade, this is private property, this is me selling something, this is you buying something. But on the internet, and if the lines are inherently much more blurry, there's a lot of kind of complicated kind of psychology mixing into everything else.

• 8:18Speaker 02

  And so it's very hard to even just mathematically model things that are going on, right? Like, in, say, the traditional world, I mean, you can use things like demand and supply curves, and you can try to measure, you know, who, like, what the price of apples is, how the price of apples will change if someone spins up a new farm or if an old farm shuts down. You, you even, you know, things like war, you can, you have things like Lanchesters laws, and you can try to measure, like, how much damage an army will take if, if it fights another army. And in reality, there's a lot of noise, but like, you know, there's things that you can try to kind of make.

• 8:58Speaker 02

  Make mathematical models of, but on the internet, it's just this incredibly chaotic space, right? And whether or not some particular mess tweet that someone makes gets 100 retweets or 1 million retweets, that's something that often just completely cannot be predicted ahead of time. It's this environment where you just don't really know. And there's this really complex set of interactions within this kind of primordial soup. And like, how do you even make, say, a mathematical model about like, what Bitcoin maximalists are going to do on Twitter? Well, okay, realistically, you can just copy what they say 12 months ago, and then like,

• 9:38Speaker 02

  maybe change like one or two words. But the, you know, the, the results of those, of those interactions are just something that's like, much more difficult to explain using tools that were optimized for explaining different things, basically, right? And so, basically, the, one of the ideas that I wanted to make is just that, like, understanding different kinds of mass psychology has become more important, right? Like, you know, Twitter runs on mass psychology, political movements run on mass psychology, Bitcoin maximalism runs on mass psychology,

• 10:18Speaker 02

  and Ethereum maximalism runs on mass psychology. And these aren't really tools that have been typically used to describe, like, say, meat space economies. But like, realistically, if we want to understand, like, say, you know, which cryptocurrencies are going to be important 10 years from now, like, you just can't, like, the psychological tools are even more important than the economic tools in terms of just understanding, like, what's actually going to happen there, right? And so, like, basically, I think it's just.

• 10:57Speaker 02

  Just realizing kind of the some, the relative importance of these different tools and how we just need the different ways of understanding this kind of world where everyone is just like so quickly interacting with everyone else and just the one action can have like extremely large consequences very quickly is just something that's very important.

• 11:19David Hoffman?

  Talak, Ryan started off this conversation asking about, you know, the, he, he said that the trajectory of 2020 ended up being very far off from what he thought it was. And this is I, something I hear you echoing when you say like the, the, the calculation or the calculus behind predictions around mass. Psychology is all haywire at this point. It's all, it's all very different from what we expect. At the same time, I've heard other people give different attitudes about 2020, which is, you know, perhaps less that 2020 was a massive curve ball and there was perhaps less of a pivot of humanity than what we thought, but rather just an acceleration. Right?

• 11:58Speaker 02

  And I think that's, I think that's the point I'm trying to make as well, right? Like it's, these things were true well before 2020. It's just that 2020 was the year where we just like suddenly flipped the switch from being like, you know, maybe like, let's say in 2018, we, our life was like, say 20% internet and 2019, it was 22% internet. And then in 2020, it just like flipped over to being like 60% internet. So there's definitely trends that were growing before and all of these things did exist before. But the fact that we saw this sudden shift to the majority of a person's life experience, or at least the part of a life experience that involves some interacting with other people, being behind the computer screen

• 12:43Speaker 02

  is something that's very significant.

• 12:46David Hoffman?

  What characteristics or dispositions or just traits would, would you say would excel as a result of like the changes that we've seen in 2020? If, if, who do you, what types of people do you think are going to do really well in comparison to others in this decade coming?

• 13:05Speaker 02

  I think people who are not too stuck in existing ways of thinking.

• 13:14Speaker 02

  In institutions that were created relatively more recently as opposed to

• 13:23Speaker 02

  as opposed to much older ones.

• 13:26Speaker 02

  People who just generalists is another really important category. Like I think, you know, we saw this with the even just, you know, the coronavirus, for example, right? Like, you know, if you're an excellent epidemiologist, but you're terrible at understanding how human beings respond to messaging, then you know, you're going to have bad predictions. If you're an expert at how humans respond to messaging, but you're, but you know, you're a terrible epidemiologist and you don't, you don't have kind of the skills needed to just triangulate information from people who are good epidemiologists, then you know, you're going to have bad predictions on the coronavirus.

• 14:07Speaker 02

  And so the fact that we have these forces just all densely interacting with each other basically means that like there's a huge premium on being able to have your hands in pretty much all of them to at least some extent. And there's definitely people who I think do that well. And then it does get easier to see people who do that less well.

• 14:35Ryan Sean Adams?

  Yeah, I think that that this was something that really shaped 2020 and comes, comes out in your article that actually understanding the world in 2020, or actually like even predicting the future, required very much of this interdisciplinary approach, right? Like, so you talked about the idea of like, there's economics and there's politics, right? But, but there's also a blend, which is this idea of a political economy. And you talked about how in 2020, we saw governments acting much more like market actors. They were almost acting like, like companies, market, like market forces getting involved in that direct way. And, and then you had on the other. Flip side, corporations acting like like governments.

• 15:18Ryan Sean Adams?

  And then I think the same sort of applies in in crypto too. It's really the multidisciplinary thinker that understands this space and succeeds in this space. And you talked a little bit about crypto as a social system too. Why is it, why is it so important, I guess, to be a multidisciplinary thinker? In in thinking, in predicting the world of of 2020 as it gets more complicated? And then why is that also important in in crypto? Is it just that all of these systems are so interrelated together? That you have to think of them as a as a holistic system? And you can't kind of like carve out the pieces?

• 16:00Speaker 02

  Right, crypto definitely is a social system. And, you know, as one of our favorite quotes goes, layer zero is people.

• 16:11Speaker 02

  You know, there is that layer. And then there's also the layer of the economics. And, you know, things like how staking works, things like, you know, how the various defi interactions work. And all of these things interact with each other, right? So this is also just another example where 2020 is more of a trend acceleration. Like you, I've been, I've been trying to point out some of these things for a long time, right? So like one example of this is just collusion. So like what in terms of, let's say, can collusion break, say, proof of work mining, right? Like from an economic analysis point of view, we have answers, right? Fifty one percent can do whatever the hell they want and thirty three percent can selfish mine.

• 16:56Speaker 02

  But then there is this, so that's basically about as far as economics can get you. Now that then there's the question, well, let's suppose that the network is broken up into one pool that has nine percent, one pool that has eight percent, one pool that has seven percent, one pool that has. You know, six percent in one pool that has five percent and then a bunch of smaller pools. So the top five pools get together, make, um, you're going to make up thirty five percent, right? Now thirty five percent is greater than thirty three percent. Can those five pools together salvage mine? Well, that actually depends on whether or not those five entities are able to work together. Uh, and that is a question of, uh, like

• 17:39Speaker 02

  cultural issues much more than it is a question of economic issues, right? Because so, you know, you have to answer questions like, well, are, like, what is the internal structure of those pools? Um, are those pool, are those pools, um, owners friendly with each other? Um, you know, do they all go to the same bars? Are they in the same chat groups? Um, are they all Chinese or are they all American? Or are some of them Chinese and some American and some from Guatemala? Uh, so the, you know, do they all speak the same language? Uh, do they have the same political opinion on, like, you know, like some random meat space issue? Uh, you know, you just like,

• 18:23Speaker 02

  you have to start kind of think, thinking about all of these, um, um, questions in order, like, because they all just have an influence on whether or not those five pools actually can get along, um, in order to make an attack. And then, of course, there's a question of, well, like, you know, what are the moral values in the community? And, uh, you know, are any of those pools going to be morally averse to attacking? Are any of the pools going to try to whistle blow if they get called up to participate in this collusion? And, and so issues about kind of morality and like just what people's ethical views are, like, actually starts to become very important when you start talking about coordination. And so, like, basically,

• 19:07Speaker 02

  there is some amounts that the economics can say, and then there is this other amount like, which usually you, you can kind of sum up to kind of which, uh, like which actors actually are, um, uh, act, only going to act as separate actors and which actors can work together and kind of approximate one larger actor. And You have to just ask about all these cultural and social forces if you want the answer to that second question. And of course, all these systems do interact with each other, right?

• 19:36Ryan Sean Adams?

  Right. So like what you're saying, Vitalik, is like you can't economics doesn't measure all of these other things, right? It doesn't necessarily measure some of the social factors. And you ask the question about like, what actually motivates human beings? And it turns out that money is one motivator. Maybe it's even sort of a useful motivator because it's a common denominator type motivator. But it's far from the only motivator of human behavior. There are so many other motivators of human behavior. I liked a tweet that you put out recently, something to the effect of even a billion dollars of capital can't compete with a project having a soul, right?

• 20:17Speaker 02

  So like That wasn't a tweet, that was part of the article.

• 20:20Ryan Sean Adams?

  It was part of the article, okay. So like, that is that's kind of what you're saying is like, there's actual tangible value in a project having a culture and a set of beliefs. Can you get into that a little bit more? So like, what do you mean about why is it important to understand what motivates us? And in order to understand crypto economic systems?

• 20:44Speaker 02

  So I think the thing that's important to remember is that most like all open source ecosystems and internet ecosystems more generally rely on a huge amount of free and uncompensated labor, right? And like, there's many kinds of free and uncompensated labor, right? So like, there's things like

• 21:10Speaker 02

  no, no, writing blogs and just answering to people's posts when they ask for help on Reddit or like, or in some Discord chat, there is participating in GitHub discussions. There's even just like, educating people about whatever project you're in on Twitter. There's running meetups, just answering other people's questions in meetups.

• 21:38David Hoffman?

  That's how I got my start in this space, absolutely.

• 21:42Speaker 02

  Yeah, there's

• 21:45Speaker 02

  Writing code, writing patches to other people's code. There's just this really long list of behaviors. And if you don't have people that are just doing those things because they love the project, then you're just gonna have an extremely hard time, right? And I think like we see this with a lot of these NBC chain projects. Like they often take this very proprietary route. They're gonna say, you know, no, we're gonna like lock 50 professionals together in a room and pay them all like $500,000 a year and just they get them to build an awesome blockchain and an awesome client in six months. And you know, sure, that can like build a software package, but like that's not gonna build an ecosystem, right?

• 22:27Speaker 02

  That's not going to build all of these kind of things that go around the software that people don't even realize are important. And if you build your thing that way, then like eventually you're just gonna have to burn even more money trying to kind of pay people to do all of that as well. And so I mean, you just, if you treat building a software project purely as a, like the way that a centralized company would treat it, then like you're just the weak in efficiency pretty much everywhere, right? Like you just, you basically have to pay people to do all of this work.

• 23:10Speaker 02

  And like, but that's work that, you know, people like, under the right circumstances, would actually just love doing, right? And like, it's important to remember what their circumstance, what their circumstances are, right? Like people do need to have like some, a feeling that they're not being exploited, a feeling that they're participating in a system which is kind of good for them and good for other people, good for other people as well. And there are projects that are just like doing a good job of this, right? And even just things like airdrops, for example, or one example of this, right? You just kind of like sprinkle a bunch of tokens basically for free to an entire community.

• 23:54Speaker 02

  I need you to swap to this great. And I thought that was a kind of great move to get this kind of community engagement. So. Like you just basically as an open open source project, like you just have to kind of make sure just create an environment where, you know, people are interested in participating, people are willing to participate. And where, you know, people like in some sense feel like the community that they're contributing to belongs to them. Right. And not just, you know, the company that's kind of theoretically most theoretically in charge of building the thing.

• 24:38Speaker 02

  Or ideally, that company doesn't even need to be in charge of, uh, like there doesn't need to be a single company in charge of the thing.

• 24:46David Hoffman?

  I think the the best and most salient example to back this up is like the absolute gargantuan amount of free marketing that both Bitcoin and Ethereum receive from their respective communities, right? Bitcoin podcasts are just done for purposes, you know, financial purposes. You know, Peter McCormack and his podcast is a very well financed podcast, but he also has huge clout in the community. And so do other, all the other Bitcoin podcasts and the Ethereum media ecosystem, which Bankless is a part of, is also like following in those footsteps, like Bankless, ETH Hub, the Defiance, like Ethereum media is doing really, really well.

• 25:24David Hoffman?

  And I think one of the reasons why these public blockchains receive so much of so much, you know, tailwinds from all this free marketing is what you alluded to, just A, just now, but B, also in your article as neutrality. Bitcoin and Ethereum have neutrality. Maybe you could talk about how neutrality plays a role in people's desires to commit their time and energy and human capital into these systems.

• 25:50Speaker 02

  Right. So neutrality, basically just to be, or I prefer even using the word credible neutrality. We kind of emphasize as the social psychology aspect of it, which is that it's not just about like convincing me that something is neutral. It's about convincing each of us that each other will make, consider the system to be neutral. And so it's something that lots of people can get behind at the same time. And I think that neutrality is just.

• 26:23Speaker 02

  Importance, basically, and a big factor of it is just like, people are willing to contribute, but people don't want to feel like they're exploited and they don't want to feel like all they're doing is to, like, just enrich some special interest. Another part of this is that, you know, people wants to contribute to a system where they can feel kind of some degree of personal ownership over it. Also, just people would prefer to participate in a system where they have some guarantee that, you know, the system is not going to unfairly go against them in the future. And, and all of these things are just much easier to accomplish when you have a system that actually is neutral, right?

• 27:07Speaker 02

  Like when, you know, you have something like an open source project or a blockchain or is generally something that has kind of the rules set up in such a way that you actually can make some kind of case that it does treat everyone fairly. And that's something that, you know, centralized systems just do end up failing out all the time, right? Like when they make any kinds of just decisions about lots of things, like, you know, it's just hard to figure out whether some decision actually is a needed technical feature or whether it's just to like preserve the company's business model or something like that. And, and so, like, in, like, if you have a project where there is a this

• 27:53Speaker 02

  kind of centralized company that feels like it's controlling things and it's getting most of the benefit, then, you know, you just lose the ability to kind of get, get these other benefits.

• 28:03Ryan Sean Adams?

  I was thinking, Vidal, like earlier, you used the term love, right? You said, you know, that, you know, people in order to tell others or volunteer, like, answering questions or writing blog posts, they have to really love the project, right? Love. And I, I was just thinking to myself, okay. I know that there are people who love Bitcoin, right? It's very easy to see Bitcoin passion. I know there are people who love Ethereum. I myself love Ethereum. There's elements of Bitcoin I love too. And I was trying to think like, what do I love so much about it? And definitely credible neutrality is sort of part of it. And even more broadly than that, for me, it's about kind of the the value system that I really identify with, right?

• 28:46Ryan Sean Adams?

  So there's something about Ethereum and to a lesser extent Bitcoin that I believe is net positive for the world, right? I think the thing that we're building with decentralized, you know, capital coordination, human coordination tools is going to reap the world, my kids, our grandkids, future generations, some net benefit. I believe that the world is skewed much more towards centralized, you know, systems and we need to kind of like balance the force at some level, right? It's this set of values that would honestly, like I would work for Ethereum for free, right? Like, you know, and both Dave and I, we have in the past.

• 29:30David Hoffman?

  Yeah, we both started that way.

• 29:33Ryan Sean Adams?

  Right, and here's the thing is like, you couldn't, you couldn't pay me enough upside to invest in some crypto projects out there. Like, there's no amount of, there's no amount of money you could pay me to put a dime into Tron. Like, I just, I don't care how much money I would make. I just don't adhere to the value system.

• 29:52David Hoffman?

  You're a direct standard.

• 29:55Ryan Sean Adams?

  So, so what is it about like, I guess, how do you create a culture like that? What, it's even sometimes hard to articulate exactly all of the values that Ethereum has. But how important are values and how do you foster that? How do you create that in a community? Or does it just happen organically? Can you not like, you know, create these things? I don't know. What are your thoughts here?

• 30:20Speaker 02

  I think founders are important and like the very early kind of influential members in a community are important. Like basically, the way that the community is near the beginning, like basically just kind of it sets the focal points. Like, you know, it just like it sets the standard for like, this is a community of people who believe these things. And if you're an outsider and you think you believe roughly those things, then you know, you would feel inclined and welcome to join the community. And if you don't believe those things, then you would feel inclined to go join other communities. So I think, once that kind of seed has been planted,

• 31:02Speaker 02

  then it's easier to maintain it. Though it does still take work to maintain it, right? Like, it is still possible, I think, for a community to just like drift over time into being something much less interesting. But the really important work, I think, is just creating that seed at the beginning. And if you don't have that seed at the beginning, then that's something that's extremely hard to create retroactively.

• 31:30Ryan Sean Adams?

  Do you know what you're talking about, Vitalik? Almost reminds me of sort of like, the way a religion might be founded, right? There's this set of values and people self-select, and no one's forcing you necessarily into a religion, at least, you know, in most areas of the world, that's not the case. But you kind of subscribe to a set of value systems, and then you find yourself like pulled into that, into that specific religion or way of thinking. And I guess that's the social element here, too. But you also address in your article, how this can kind of take a dark turn, too. And you said, we thought we were building nations, and it turns out what we got was digital nationalism, right? So this idea of like maximalism,

• 32:10Ryan Sean Adams?

  how can cultures kind of turn a little bit dark? And I guess, I don't know a word for it, but like, small, senile, small in their thinking, small tent, and close-minded might be some words to describe it. What are some of the negative effects of this social dynamic in crypto?

• 32:35Speaker 02

  And I think like, first of all, like, one of the points that I feel like I tried to get across is that, like, we saw even down to a very big, a very fine level of detail, phenomena happening in cryptocurrencies that seem to almost perfectly mirror phenomena that we see in like political systems, right? Like, we see things like, you know, the civil war between, you know, you have a civil war inside of country X, and then eventually country X splits in half, and then you have one country that's called like, you know, like Democratic Republic of X, and the other country that's called People's Republic of X, or like whatever the word permutations are.

• 33:13Speaker 02

  And then you have some other country Y, and that country Y supports like the one that looks more like an offshoot, and people in the other one think that country Y is only supporting them because they want to like drive a wedge and and attack the first country, but people in country Y think that they're that will know the other one is just more aligned with their values, and then the story goes on, right? And in cryptocurrency land, like, we've basically replicated that exact phenomenon, like, down to very fine levels of detail, just basically within 10 years.

• 33:52Speaker 02

  And I thought that was interesting, right? It's like, interesting because if something can just appear twice in these completely different contexts with completely different kind of laws for what systems are and how they interact, then like, this is a very kind of deep and fundamental kind of primitive of like basically mass, so, and of social interaction that is just like, is going to be very hard to kind of move beyond completely.

• 34:30David Hoffman?

  What you're talking about, just for the listener, is you're talking about the Bitcoin, Bitcoin Cash civil war, and then you're also talking about the Ethereum, Ethereum classic split.

• 34:38Speaker 02

  Correct.

• 34:41Speaker 02

  Yeah, so.

• 34:44Speaker 02

  The, um, now in terms of like, I think which communities are more healthier and which communities are less healthy. I mean, so one of the quotes, and this is one that I did make on Twitter a while ago is, um, like, I think evil comes mostly even not from greed, but from fear. Right? Like, like, we have a culture, I think, of, um, you know, thinking about greed as being kind of, you know, the ultimate evil. And talking about, um, you know, evil villains who wants to take over the world, uh, and, uh, you know, evil banksters who wants to make like billions of dollars by defrauding people and all of these things.

• 35:27Speaker 02

  But I think like the reality is that people are much more easily able to convince themselves to do the worst things. When they feel like they or their communities are under existential threat. And, I mean, like, this is something that you see if you kind of, if you study, you know, interactions between countries and political parties and like history more generally. And I think this is something that we see in the crypto space as well, um, right? Like, I think, uh, you know, the Bitcoin community, for example, or let's say the Bitcoin small blockers, for example, I think like genuinely felt like they were under,

• 36:07Speaker 02

  uh, or they and their values were under existential threat from the big blocker movement that was, uh, trying to push a hard fork to increase the block size. I think the Ethereum community was at its worst, maybe in, uh, well, one example of one of the times was, um, right after the Ethereum classic hard fork where a lot of people are basically arguing that, you know, any like, there's no legitimate reason to oppose the Dow fork. And if you oppose, like, the people who are, or there's no legitimate reason to support Ethereum classic. Um, and if you support Ethereum classic, chances are you're probably just a Bitcoin show, which I think like,

• 36:47Speaker 02

  you know, a lot, I think in a lot of cases, it just ended up being completely false. And like, and I even believed some of those things myself at that time. But like, the reason why everyone was kind of whipped up into a frenzy is because that this was the first time that that kind of hard fork in Ethereum happened. And it felt like, you know, like ETH had gone down from $12 to $8, right? And ETC was gone, it had gone up from $0 to $4. And it felt like there was this existential possibility that the the ETC situation would basically just completely wreck Ethereum as we know it. And in the, so when your community is just is faced with that kind of threat, then people are just going to act worse, right?

• 37:29Speaker 02

  And I think, like, it's true with Bitcoin, I think it's true with Ethereum as well. It's, I think, true with basically any community. And if, again, the kind of normative conclusion from this, I think, is that if you want to have better relations between the community is then like, basically, a community is just like, need to be able to convince each other that they are not interested in kind of vi- like violating each other's, like, basically, most fundamental, like, like existence, basically, right?

• 38:11Speaker 02

  That they're not interested in creating a scenario that would lead to the complete annihilation of the other one. And that's, that's harder than it seems, right? Like, you can't just kind of have a couple of leaders go out and say it, because there's inevitably some other people in the community who would go out and say something else. And then someone gets into a Twitter fight and they say something that gets quoted for, for, you know, six months or five years. But like, that feels, something like that kind of feels like it's one of, like, basically, the only way to have less of that sort of thing. And like, sometimes it is hard, right? Like, sometimes it's hard because the problem isn't just like the way people behave. The problem is just like fundamentally what the things are, right?

• 38:56Speaker 02

  So, like, like, for example, if you're a Bitcoin person and you believe that Bitcoin only has, like, only has value because of the network effect and because of being number one, then, you know, you perceive any other cryptocurrency getting too big relative to yourself as being an existential threat. Because if you become number two, then from your point of view, like, three months later, you're going to be number 200. And that, like,

• 39:23Speaker 02

  I think that's Ethereum itself has a kind of some risk of believing of believing that if I'm like someday other smart contract platforms are going to become popular. So like creating a like space and kind of creating intent to have an ecosystem that allows kind of multiple crypto communities and even a kind of multiple blockchains to survive. I think is like, this is one of the reasons why I'm kind of it tends to be fairly anti maximalist. Like, I think it's just kind of necessary to have peace, right?

• 40:02Speaker 02

  Like, if like, the more people believe winner takes all, then like, you know, the corollary of winner takes all is, you know, loser take loser loses everything. And if you like, if people think that if they're the loser, they lose everything, then they're going to be willing to do just like the worst things in order to like increase their chances of winning. And that's something that I don't want to see.

• 40:26Ryan Sean Adams?

  There's an element of what you're saying in what you wrote, which was, which was kind of like new system, same problems. You know, the, the, the, the same sort of fragmentation and tribalism and nationalism that we see in political systems. We are now seeing play out in crypto in remarkably similar, similar ways. Does that make you a bit pessimistic about, about crypto in any way? Because like, so we've got a new system, but have we ported those same problems over? And is that reason to be pessimistic?

• 41:01Speaker 02

  I don't think so. I think, well, I think like pretty much almost inevitably from the beginning, I was expecting crypto to be a process of kind of starting off with very wild dreams, but a very small scale. And inevitably kind of scaling back on its dreams somewhat and kind of figuring out what parts of what it wants to accomplish are actually realistic. While at the same time, you know, actually becoming a significant force that can.

• 41:33Speaker 02

  Impact, you know, global affairs and the future of humanity. And I think like, you know, we're on that trajectory, right? Like, we're on that kind of trajectory where it's clear that there's some things that crypto is not going to do and some things that crypto is not going to solve. But at the same time, I mean, you know, it's gone up from being this tiny little bubble that nobody cares about to be in this big thing that, um, you know, just all sorts of like mainstream figures and artists and intellectuals are starting to really follow and care about.

• 42:06David Hoffman?

  What, what about the Ethereum community or Ethereum and culture gives you pause? Or what, something, what about the Ethereum community would you criticize that you would like to see changed? Or just be worked on into the future?

• 42:19Speaker 02

  Hmm, I remember you asked me this question almost a year ago. Uh, yeah, I think, um, one of the things I answered is just this kind of perception that, um, you know, Bitcoin has a, uh, like a strong and kind of focused narrative, whereas Ethereum does not. And I think my answer was something like, well, you know, I, in definitely in less certain terms, but because I, I guess I, it's hard for me to say it in less certain terms because I believe it more certainly now. It's like, you know, you know, focus is overrated and the whole point of Ethereum is that it's, um, like, it's not a missile, it's a, it's a, it's a jungle. Uh, and, and, uh, you know, the point of Ethereum is that it's, uh,

• 43:03Speaker 02

  not trying to like accomplish this one single thing of, um, you know, replacing global fiat currencies with ETH, um, and using, um, the, uh, power of Austrian economic theory to ensure that this definitely brings a human prosperity. Um, and, um, you know, doesn't lead to like mass inequality if it happens over the course of three years or whatever. Um, but like, I think in, in, you know, Ethereum instead was, it's like, there's, there's many dreams, right? Like there's, uh, obviously I think Ethereum does inherit the kind of Bitcoin dream of just creating this kind of independent asset that people can directly own and control

• 43:47Speaker 02

  without any reference to, you know, banking institutions or, um, or governments. I mean, there's also this dream of enabling, you know, decentralized financial applications. There's also.

• 44:01Speaker 02

  This dream of being this kind of common interaction layer for just like different kinds of open source software, right? Like, you know, we had open source and now we have open state. And you can have these kind of applications that don't have a dependency on one single owner and but that can still interact with each other in a kind of much more interesting ways. We still have the dream of like experimenting with, I know, decentralized governance and decentralized applications. We have things like prediction markets and prediction markets have been, you know, very exciting over the last couple of months. And I think I've outed myself a couple of times as a proud N Trump whale.

• 44:44Speaker 02

  And, you know, that was interesting. Like, that was the first, even one of the first times when, you know, the Ethereum blockchain was like providing direct value to me as a user that I would just not be able to get on any other platform.

• 45:02Speaker 02

  But by the way, just for the listeners, N Trump whale means a someone who is buying tokens that pay $1 if Trump does not win the election.

• 45:10David Hoffman?

  And importantly, you were buying them for less than a dollar.

• 45:13Speaker 02

  After the election, correct.

• 45:14David Hoffman?

  After the election was done, you were buying N Trump tokens, which pay out a dollar if Trump doesn't actually win and you were buying them for less than $1.

• 45:23Speaker 02

  For 85 cents, yes.

• 45:25David Hoffman?

  85 cents. Oh, that's a, that is a spread.

• 45:31Speaker 02

  So, that was, so I think like the, and then there's this big long tail of applications, you know, using them for like some kind of like identity management. You like using them for, and we'll talk about social recovery wallets later, but one of the ideas, the longer term ideas that I have is that I think you can have social recovery wallets for accessing web two services. So like accessing centralized services and they like, it would be nice to have ways of logging into centralized services that are not dependent on other centralized actors like Google or Facebook, but or Twitter. But that's kind of skipping ahead, right? That's also a blockchain application.

• 46:13Speaker 02

  And then, you know, there's all of this like identity, there's like certificate related stuff. There's just like money transfer, just transfers, remittances, donating to charity. So. There's this just a long, interesting tale of applications and you know, there's plenty of people on Ethereum land who believe in some of those applications and don't believe in other applications. And that's like a thing that I realized is that, you know, that's healthy, right? Like, you know, it's like, no, Ethereum is not a missile, it is a jungle, right? It's like, there is no single part of it that has to succeed for the whole thing to succeed.

• 46:53Speaker 02

  And, you know, it is just like creating this new set of kind of tools and this sort of technological and economic substrate for a new kind of economy. And like, that is the vision. And that's something that I think like was less clear to me a year ago, but it's becoming much more clear over time. And, you know, I feel like it's becoming much more clear to the Ethereum community itself as well over time. So I think like, just kind of improving on kind of telling that story well is

• 47:27Speaker 02

  one thing that I think is just continues to be important. I think it's just

• 47:34Speaker 02

  it's just the importance to kind of, you know, strike back against these kind of memes that some people give, which is that like, you know, Ethereum has no values or that that that recent article from Lynn Olden where I think, oh, she just said that, you know, Bitcoin culture has more of this like ethos and Ethereum culture is more gamers. And I know that may have faced a lot of that, you know, nothing against gaming, but you know, the the vision is much broader than just gaming. But I think we've definitely been doing a not good enough job of properly articulating it. And then, so that was one thing.

• 48:12Speaker 02

  The other thing, of course, is like, it would be nice if we can find some way to kind of communicate a narrative to other crypto projects to just convince them that Ethereum is doesn't, does not, is not an existential threat to them and that and they like

• 48:38Speaker 02

  Like basically that Ethereum is not an everything killer, right? And I think like it's true that Ethereum is not an everything killer. And there's lots of other projects that have managed to kind of exist and various kinds of kind of symbiosis with Ethereum. And I think that's great. And so if the more we can kind of get other community energy, other communities and their energies to be kind of working with the ecosystem instead of them just very understandably feeling forced like they're like they have to compete against it and then the better.

• 49:14David Hoffman?

  As our conversation around this particular blog post comes to a close, I'd like to read out some of your conclusions that you put in the last paragraph. And by the way, to the listeners, this conversation that we're having with Vitalik here is a great supplement to the blog post, but absolutely not a replacement. So you can definitely go and read the blog post yourself at vitalik.ca. You will find it there. In your conclusion, Vitalik, you write three short bullets and I would like to read them here and we can go over them. One to one interactions, this is your predictions for like or your assessment for the current state of the world. So we have a world where one to one interactions are less important, one to many and many to many interactions are more important.

• 49:58David Hoffman?

  And then the next bullet, the environment is much more chaotic and difficult to model with clean and simple equations. Many to many interactions particularly follow strange rules that we still do not understand well. And then lastly, the environment is dense and different categories of powerful actors are forced to live quite closely side by side with each other. We've talked about some of these topics already here so far in this conversation, but I'd just like to turn the mic over to you and kind of get you to expand on some of these thoughts, predictions and how the evidence that you saw play out in 2020 kind of led you to these conclusions.

• 50:33Speaker 02

  Sure, so for the first one, and I think I talked about this a bit, right? Like, traditional economics tends to deal more with these one-to-one interactions, where, you know, there's one buyer and there's one seller, and you just have this series of transactions where, like, you know, Alice sells an apple to Bob, Alice sells a different apple to Charlie, and if Bob has the money but Charlie doesn't, then Bob gets the apple and Charlie doesn't. And so you have this economy that you can kind of fairly easily decompose into these kind of fairly small interactions. And, you know, we have things like these fundamental welfare theorems,

• 51:13Speaker 02

  you know, supply-demand curves, just all of these long list of economic principles for dealing with those things. But on the internet, like, the average interaction is not one-to-one, right? Like, we are recording this podcast, and but then lots of people are going to be listening to it, right? That's that in itself is like a three to 10,000 interaction.

• 51:36Speaker 02

  Every time I write an article, that's a one to 10,000 interaction. Every piece of code going to the that gets uploaded to an Ethereum client is a few-to-many interaction. A conversation on Twitter is a many-to-many interaction. Even just like the mass of psychology and economics of these self-referential crypto markets is a many-to-many interaction. So, like, that those more complicated forms of behavior are just becoming more important pieces of understanding of the world as it's going to be. And then, an important result of this is just that the environment is much more chaotic, right?

• 52:19Speaker 02

  It's, um, there's some a lot of, I'm going to reverse consequences of these interactions that are just hard to predict, hard to understand. Sometimes we haven't, we don't yet have good tools for understanding them. Sometimes there just are no good tools for understanding them. And it's Like just more challenging to understand, you know, what the results of these things are. And so we just need to kind of keep a more open mind toward these things. And then the last one, I think, is also important, right? Like this goes back to the section that's right before the the section at the end, right? This idea that we, the world in general was this kind of dense environment where we have these different categories of powerful actors.

• 53:01Speaker 02

  So like one of the things that I talked about is basically, you know, did the did kind of, you know, the cypherpunk movement as defined by things like these 1996 and and of crypto anarchists to document succeed or fail. And the question is, basically, it turns out the answer depends on is is your goal eliminating a big government? Or is your goal creating big something other than government, right? If your goal is the first one, then you failed. And if your goal is the second one, then you completely succeeded, right?

• 53:39Speaker 02

  Like, you know, in the 2020, like, big government is still strong, but big business is like strong at the same time, right? Like, you know, we, the, you know, it it's definitely at least looking like the the US's space program at this point is basically Elon Musk. And, you know, that's something that I think might have been kind of even difficult to foresee even 10 years ago, right? But, you know, at the same time, like, I mean, we, especially with, you know, the virus situation and like both, you know, things like lockdowns and things like vaccine distributions, governments are clearly this continue to be this big and important force.

• 54:23Speaker 02

  And then there's also kind of big things other than governments, like there's just like big. Amorphous, just mobs, you know, big ideologies, big movements. And so like, there's just all of these different kind of large scale forms of human in coordination, both centralized and decentralized. And they're just all like at all time highs of power at the same time. Right. And that's not really a frame that I think most people were thinking about 10 years ago. Right. I think most people 10 years ago would have been thinking about the frame of being, well, it's a kind of neither can live while the other survives situation.

• 55:05Speaker 02

  And it turns out that, well, no, both of them live and both of them or all of them are living and all of them are surviving and even thriving. And, you know, yes, the interactions between them are kind of just very complicated. And I think like this is also a bit of a harbinger toward the kind of role that I expect crypto to play. Right. Like I, I don't expect crypto to just kind of like wash away all of these existing, even more centralized forms of coordination. I expect it to kind of complement and provide an alternative to them. And I think that's something that it's so well on the way to doing quite successfully.

• 55:45Ryan Sean Adams?

  Well, Vitalik, this has been a fantastic deep dive into your article. You know, one last question that is maybe more in the current event camp, but I think maybe fits the mold of this, this article before we move on to roll ups. So ETH price just recently hit all time high. And of course, we talked about how these crypto systems are very much psychological systems as well as social systems, all of these things. Do you think ETH at all time high is good for the collective psychology and community of Ethereum? Or, or bad? Because I, I think, you know, somebody could make the case for either or. What's your take?

• 56:29Speaker 02

  Good question. And I think all time highs are definitely psychologically good for a community. It's the thing I think that's like in general, I feel like whenever there is a bull run, the first half of the bull run is very healthy. The second half of the bull run is very unhealthy. And, and, oh crap, did I just corner myself into a price prediction by implicitly calling now the first half of the bull run?

• 56:58David Hoffman?

  First ever Vitalik price prediction.

• 57:02Speaker 02

  Okay, don't. Well, okay, what I will say is that to me, the present moment kind of psychologically feels like the first half of a bull run. But then again, like at the same time, these are in some ways fundamentally new and uncharted waters and the trend can easily break and it could easily be one of those bull runs that just like abruptly ends during the first half. Like that happens all the time. Like the the XRP bull run definitely abruptly ended when, you know, the SEC and then of delightfully sent sent the thing crashing down. The but. So in terms of kind of people's

• 57:44Speaker 02

  psychological experiences, I think it definitely kind of feels like it's in this sort of relatively kind of healthy phase right now. But it is one of those things that inevitably ends up like kind of flipping into a less, a less psychologically healthy, healthy phase, especially if like it goes on long enough that people start feeling like they're entitled to it. And like that's always happened historically, right? And there's always been these periods where people just like almost stop working because they're just too focused on the on the price. And then also, like

• 58:23Speaker 02

  in addition to the effects on the psychology, there's also things that happen in bull runs, like, you know, transaction fees going up really high. And that's definitely something that I'm

• 58:37Speaker 02

  That crypto, we started that the Ethereum ecosystem and it solves very soon. And we already have the technology, right? ZK rollups have been running for months. Optimism announced the kind of very, their very first limited mainnet last week. But like we do just needs to get to the point where these scaling techniques, like rollups in particular, are just actually able to absorb even the existing demands, right? Because like, right now, transaction fees are high. Like I, yeah, I tried out the social recovery wallets for like Argent. And I looked at the transactions and like the, the recoveries cost $50. And that's just crazy, right? Like, no, no, no, this stuff needs to move on to rollups very quickly.

• 59:21David Hoffman?

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• 1:01:05David Hoffman?

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• 1:01:32Ryan Sean Adams?

  This is an incomplete guide to rollups. So Vitalik, can we go through the incomplete guide to rollups? Maybe direct this to someone who has heard about the buzz that maybe rollups are Ethereum's next big scaling solution, right? And it's kind of the promised land of reducing gas fees. Tell us, what are rollups? Where would you like to start with this?

• 1:01:56Speaker 02

  Sure. So rollups are a member of this family of scalability solutions that we call low layer two scaling. And so like there's this long running dichotomy between layer one scaling and layer two scaling, where layer one scaling says we increase how many transactions we can process by making the blockchain able to process more transactions. And layer two scaling says we increase the number of transactions we can process by moving work off chain. And instead of like running everything on chain directly, we only run a kind of more limited verification activities on chain. And so we use these more clever contraptions to reduce the need to use the chain in the first place.

• 1:02:40Speaker 02

  And you know, in the case of Bitcoin, like this was basically the topic of their civil war. But in the case of Ethereum, you know, we're basically doing layer one and layer two scaling at the same time, right? We have sharding for layer one scaling, but we also have this very

• 1:02:56Speaker 02

  Kind of healthy and rich layer two scaling ecosystem. And I talk about the three I'm scaling approaches. So there's channels, I'm in plasma and rollups. And channels are this method for optimizing one to one interactions. So for example, channels are really good at the use case of like, let's say, I'm selling you an internet connection and you want to pay me per per megabyte. Right. And then like, well, what happened is that like, I would start for giving you an internet connection. And then every time it would reach one megabyte, like you would just send me these off chain messages that I call tickets.

• 1:03:37Speaker 02

  Right. So your first ticket would be a signed message that just says, I'm paying you 0.001. Your second ticket would be a message that says, I'm paying you 0.002 and so forth. And the point, the way this works is that I only needs to actually put on chain, the very last ticket or the highest value ticket that you send, right? And so basically what you're doing is you're just, you're making these payments of, but you're not, but we're not yet committing them. And you just constantly keep paying more by just replacing these payments with higher value payments. And then when I publish the last payments on chain, I'm basically kind of settling all of these payments at the same time. And it's happening in one transaction.

• 1:04:19Speaker 02

  And there is a bit, the smart contract implements this kind of interaction game. We are basically like, let's say, if you try to submit one of your tickets that has a smaller payment, then I can challenge and I can send your ticket that has the higher payment. Or if I just disappear completely, then you can send your, your own payments or your, your own tickets to close the channel and get your money back and so on. So channels are good for bidirectional payments. And there are things like the Lightning Network and Raiden that tried to. Expand that out to broader payment networks, but they also do have some weaknesses, right? They're fairly complicated to deal with. They have these high capital requirements and so forth. Then there's plasma.

• 1:05:05Speaker 02

  And plasma is this very technically clever construction. That it turns out plasma is like really amazing for dealing with the non-fungible tokens. Because it's just like the whole idea with plasma is that you basically like assign every unit of an asset, a different idea. And then you have this kind of Merkel tree contraption where you basically, if an asset has some some id x. Then the transaction that corresponds to that address goes into a Merkel tree at index x. Then you publish the Merkel roots on chain. And then if someone who has like some asset x wants to withdraw it. Then they would publish an operation on chain.

• 1:05:50Speaker 02

  And then they would have to provide that Merkel branch. And if someone else wants to challenge them, well, they can do that. And then all the challenges happen like just by providing these Merkel branches. So plasma is this really clever thing. It's good for asset transfers. It's good for payments that can be do, can be used for exchange. So the OMG network is has been doing a great job of kind of pushing the plasma vision toward its logical conclusion is basically and basically doing as great a job as can possibly be done with it. So very happy that their work exists. But then we move on to the third solution, which is rollups, right? And rollups are

• 1:06:30Speaker 02

  a fascinating class of technology, because in some ways they're not a full layer two scheme, right? And what I mean by that is that in a traditional layer two scheme, all the data and all the computation of at least each additional transaction is fully off chain. Right? Like in plasma, you do have to publish Merkel roots on chain, but that's 32 bytes. It's 32 bytes if there's 10 users and it's 32 bytes if there's 10,000 users. In a rollup, you have to publish like it looks like somewhere around like 10 to 15 bytes of.

• 1:07:05Speaker 02

  Data on chain for every transaction. Now, you are able to move all the computation off-chain, and you are able to move most of the data off-chain. But you do need to have like some amounts of data on-chain for every transaction. And it turns out that the ability to have data on-chain basically just gets around some very fundamental game theory issues that have to do with data availability. And in my blog post, I linked to this YouTube video that I made. I think it was in some Stanford conference or meetup or one of those where I just talk about like why data availability is hard

• 1:07:46Speaker 02

  and like why there's these complicated game theory issues around like you just like basically you can't have a fraud-proof system for data the same way you can have a fraud-proof system for computation. And rollups or plasma and channels kind of get around this issue by relying on this explicit concept of owners that basically says that like every asset has an owner. And if the owner for that asset misbehaves, then the system can fail, but the system can fail in only one direction. And that direction basically is that the owner loses the asset. But in a rollup, you actually can just make a hard guarantee that says the state definitely will be processed correctly. And it turns out that that's really important if you want applications to become more general purpose, right?

• 1:08:31Speaker 02

  Because in more general purpose applications, like it's just you can't map assets to owners, right? Like, who is the owner of Uniswap is the easiest example, right? Like, there is the, there is no single actor who's kind of the logical beneficiary of everything that happens inside of Uniswap. It's just this like automated thing that exists on-chain, and it benefits everyone, and it's owned by no one.

• 1:08:57Speaker 02

  So. Then I get into like, basically, what is, how does a roll up work, right? And the core idea of a roll up is basically that there is a smart contract on chain. And that smart contract maintains a state root. It maintains basically a Merkle hash of all this state inside the roll up. So that means all the account balances, all the contracts code, everything inside the roll up. You have this Merkle hash and then Merkle hash gets maintained by the roll up contract. Anyone can publish what we call a batch, but in a batch is basically this collection of transactions in this very compressed form, together with basically a record of the previous state root and a record of the new state root. So a batch is basically a claim that says, if you start here, if you start from this this state root

• 1:09:41Speaker 02

  and you apply these transactions, then this is the new state root. Now, in reality, the batch does by itself, does not have enough information to fully compute the state, the new state root, because if you want to actually compute that, you need to have the Merkle branches. And of course, you don't actually want to compute all this stuff on chain. So instead, what happens is that the roll up just believes the batches by default. And then you have one of two mechanisms for proving that these batches are correct, right? So one of them is optimistic rollups and the other is ZK rollups. And here's where we get to the core difference between these two great families of rollups, right?

• 1:10:21Speaker 02

  In an optimistic rollup, what you have is a system where you basically kind of trust but verify, right? So the smart contract kind of trusts the batches by default. And it just accepts the results of the batches by default. But then if so, like, there are nodes in the network that actually do run the full computation. And if one of them discovers that something is wrong, then they can publish a challenge. And if they get challenged correctly, then that the batch that's incorrect gets reverted. And whoever submitted the badge loses their deposit and the challenger gets a reward. And then you kind of continue from there.

• 1:11:03Speaker 02

  And so optimistic basically says trust by default, but if someone challenges. Then if the thing the challenge is incorrect, then you revert it. And as long as you trust that there's at least somebody online who can revert, then you know, the mechanism works. Now, ZK rollups, they use validity proofs, right? ZK rollups use these fancy cryptographic proofs that we call ZK snarks. And they basically prove directly that the post-state root is a correct result of executing the batch on top of the pre-state root. And the way that these proofs work is really complicated. And I actually, I I've tried to make a couple of explanations of this. I'm sure I'll try making more explanations of this in the future.

• 1:11:45Speaker 02

  But these are just incredibly powerful and just incredibly clever mathematical contraptions that actually let you make a proof of a computation that takes a long time to compute, where that proof itself can be verified extremely quickly. And this is what ZK rollups rely on. So there's these fairly complicated trade-offs between optimistic and ZK rollups, right? In terms of like the gas, the fixed gas cost of each batch, which influences how frequently batches can be published. The withdrawal period. So as ZK, optimistic rollups, the the fixed cost per batch is much smaller, which means batches can be published much more frequently. ZK rollups have instant withdrawals. Optimistic rollups have withdrawals that take one week.

• 1:12:30Speaker 02

  But the thing that you can do if you want optimistic rollups to have instant withdrawals is you can basically have a kind of third-party market. So basically, like, if I have, say, one if that's being withdrawn in progress, then if you were validating the rollup and you are perfectly confident that that withdrawal is correct, then what you can do is you can just buy that, buy my right to one if for, say, one if minus a fee. You could just buy up my withdrawal rights for, say, 0.9999 if. I would get my 0.9999 immediately, and then you would just wait a week and then you would get your one if at the end, right? So.

• 1:13:11David Hoffman?

  Or your 0.0001 if.

• 1:13:13Speaker 02

  No, no, sorry. I would get.

• 1:13:15David Hoffman?

  Yeah, the total, I see. Sorry. Yep, yep.

• 1:13:17Speaker 02

  I sacrificed my right to one. Instead, I get 0.00999 immediately. You, as the buyer of the withdrawal, pay me 0.9999 immediately and you get the full one at the end. So. Like this is a technique that's available for optimistic rollups to have in stable straws, but it does have capital costs. And importantly, it doesn't work with NFTs because with NFTs inherently, like there is nobody who has like a second copy of the same NFT that can collateralize. But for coins, it works amazingly. Complexity of technology, optimistic rollups are simpler.

• 1:13:56Speaker 02

  Generalizability, optimistic rollups are easier to have kind of full general purpose EVM computation for.

• 1:14:05Speaker 02

  And this is something that's really important, right? Like there already are ZK rollups that are live and ZK rollups. Like there's a ZK sync, there's a loop ring, there's the diversify, and those can be application specific, but

• 1:14:24Speaker 02

  it's very hard to make them support like much more general purpose computation. Whereas with an optimistic rollup like, well, we already have one on mainnet. That's basically running EVM code on layer two. So, and then per transaction on-chain gas costs. So this basically means like are the the on-chain costs so that you have to pay per transaction. So this is basically paying for the 16 bytes. It turns out that there's technical reasons why for certain types of transactions, you need more bytes than an optimistic rollup than a ZK rollup. And then there's off-chain computation costs, so which are actually lower for optimistic rollups than they are than there are for ZK rollups.

• 1:15:06Speaker 02

  So there's complicated trade-offs, but my kind of opinion, summing it all up, is that I think in the short term, optimistic rollups are likely to win for general purpose EVM computation. ZK rollups are likely to win for simple payments and like some very specific use cases. But I do think that, you know, on a five to 10-year time horizon, ZK rollups are gonna are gonna be winning out in all use cases. So I think like the fact that, you know, teams like Optimism and Arbitrum are doing optimistic rollups today is perfectly fine. And I think it was it's completely the correct path in order to

• 1:15:45Speaker 02

  Just get some kind of scaling out for Ethereum in 2021. Yeah, but in like in the there is going to come a time when ZK roll up ZK snark technology improves. And ZK snarks are capable of moving actually verifying EVM computation. Now expect to see demos of ZK snarks, you know, doing things like verifying solid decode this year. But just keep in mind that there's a big difference between a demo and a production implementation. Right? Like, because once you have a demo, like you still have to. You have to security audit it, you have to debug it, you have to really make sure that the verifier is correct.

• 1:16:29Speaker 02

  And those those things are hard, right? Like, I personally would much rather trust, you know, $10 million of my own money to an EVM optimistic roll up than to an EVM ZK roll up for at least the next couple of years. But in the long term, ZK roll ups are, I think, are going to be everything. And so like I, my advice to teams like Optimism and Arbitrum is that I think they should start kind of ZKifying themselves fairly soon. Like, you know, it's not so it's not so urgent that like people should lose interest in projects that are optimistic roll ups today. But I think projects that are optimistic roll ups today should have the attitude that they are not going to be optimistic roll ups forever.

• 1:17:11Speaker 02

  And they should have the like, they should start putting together their strategies for ZKing themselves. So I then I talk kind of more technically about.

• 1:17:26David Hoffman?

  If I could cut in here, Vitalik, I would just like to clarify one thing between optimistic roll ups and ZK roll ups. What what would you say is the defining characteristic difference between optimistic and ZK roll ups? That makes you long term, long term belief in ZK roll ups? Like, what's the real what's the real separation between those two things that makes you optimistic about ZK roll ups long term?

• 1:17:49Speaker 02

  Sure, so one is like just ZK rollups have instant withdrawals even and without any collateral requirements. Another is that ZK rollups do not have this kind of one of N online requirements in order for someone to be able to publish a fraud proof. And that's valuable because like it opens the door for ZK rollups to be able to you go up and process things like, you know, tens of thousands of transactions per second where in an optimistic rollup, once you start having that many transactions, then you know, it starts like it's use, it starts becoming

• 1:18:30Speaker 02

  less obvious that there will always be enough honest nodes that are checking the that all the computations are done correctly. Also, the data efficiency, right? Like the fact that so I have a table a bit further below where I look at the mixer example and the one table further below. There it is, right? Like and a mix, the mixer only has a 77x scalability gain in optimistic rollup, but a 570x scaling gain in a ZK rollup. And the reason why this is true is because ZK rollups allow you to have a less data on chain because in a ZK rollup,

• 1:19:12Speaker 02

  you only need to have enough data on chain to update the state tree. Rather than an optimistic rollup, you have to have enough data on chain to verify the full computation, which is a slightly larger amount of data. So I yeah, like I don't now to be to be very clear, right? I don't think that these advantages are decisive in 2021. And like I think in 2021, like optimistic rollups and ZK rollups are both totally fine. We're going to have these withdrawal markets. I mean, we're going to have ways for people to withdraw from, you know, things like optimism and arbitrage instantly. And in 2021 and in 2022 and like

• 1:19:54Speaker 02

  even going a bit further, the fact that optimistic rollups just rely on Clean EVM verification and like the, you know, they have surprisingly simple a fraud proof of verifiers. I think is a decisive advantage as opposed to ZK rollups, which needs to have just like this much larger and complicated compiler code to convert solidity or Viper or EVM into arithmetic representations. And there's just much more attack service for bugs in there. But like over the longer time horizon, those issues will get resolved and the calculus is like solely going to shift toward the ZK side.

• 1:20:34David Hoffman?

  So I like to take a stab at trying to go through the history of this to lead into my next question. Ethereum L two scaling started with state channels, uh, which were, and the great thing about state channels is that, you know, it's just between two parties. You can make any number of transactions without committing anything to the blockchain. And then to wrap up your day, you commit something to the blockchain that state channel ends. And then you bundle up, you know, 10,000 plus transactions into just one little packet of data submitted to the blockchain. That's great. And that's great for two parties or just a low number of parties. Plasma was an attempt to have one to many or many to many type of interactions of various types. Um, and there are different constructions of plasma that did different things.

• 1:21:16David Hoffman?

  Um, but it's, um, it ended up being weak because of this thing called this data availability problem, which in, in short, is that it's hard for Ethereum, the blockchain to know about the plasma L two chains and reason and know about how to manage that without, without making assumptions. And assumptions, we don't like assumptions in the world of cryptography. That's not, that's not how we play in the world of crypto economics. Uh, we like things to be secure. Uh, and then, so then that turned into the rollups revolution of the optimistic and ZK flavor, where there was a compromise made where we figured out we could actually just regularly submit, you know, some data to the Ethereum blockchain to solve that data availability problem.

• 1:22:00David Hoffman?

  And so it's not, we aren't getting like millions of transactions per second. We are still generally bottlenecked, but the actual bottlenecks are actually still pretty wide and there's. Lots of optimizations there that can make them even wider. And that's kind of where we are today. How do we know that we aren't, how do we know that we are towards the end of this research and development process? How do we know in like 2021 to 2022, we're not going to come up with this new scaling system? What indications or evidence do we have that we have approached the end of this research and development phase?

• 1:22:33Speaker 02

  That's hard to tell for certain, like there's no theorem that says that like these are the only scaling mechanisms that exist and there are no others, but I think like there are kind of heuristic arguments that suggest this. One of them is just the windy arguments, right? Like we've had channels and plasma and rollups and basically nothing else for something like four years now. I'm in rollups themselves, like I, they were like in their current form, they were kind of created in 2018 to 2019, but there was this much earlier kind of thing of shadow chains that I published back in 2014. That kind of is a prelude to rollups.

• 1:23:15Speaker 02

  So we've had a kind of long and growing time span within which we've known about these three techniques and we've seen no others. Another thing that I, arguments that you can make is this mathematical arguments that basically says like if there are end users, how much data gets published on chain? Not taking into accounts deposits and withdrawals and fraud. And you can classify them very easily, right? In a channel, the answer is zero. In a plasma, the answer is O of one. So just the one Merkle root, regardless of how many users there are. And in a rollup, it's O of N, right? So like there's a bit of data per transaction. And so that basically covers the space, right?

• 1:23:59Speaker 02

  Now you might say, well, is there, are there things between one and N? Are there things that are like square root or like logarithm or some weird thing in between? And I think my intuitive answer there is just probably not because that just means that you eventually you have less than one bit on chain per transaction. And like, how much can you actually do with that? But intuitively, it just feels like those three numbers like zero, one and just kind of cover the whole range. And you know, you can tell how with the increasing on-chain load, you have increasing capability, right? Like plasma gives you. Increasing capability from channels, what the particular thing being just the ability

• 1:24:42Speaker 02

  to send off chain to new users who have not yet been inducted into the system. And then going from one to N, you have this other gain of capability, which is being able to go general purpose. So like, there is that kind of heuristic intuitive reason to potentially believe that like, you know, these three options just are the options out there and that everything we're going to see from here is just like different permutations on that.

• 1:25:09Ryan Sean Adams?

  So I think rollups are definitely very exciting. What's what's also exciting is we can begin using them now, right? So this is no longer hypothetical, theoretical, like Loopring has one in production. Synthetix just released their version on optimism. So it's going to be very exciting to see how both optimistic rollups and the ZK rollups play out. I had one other question for you, and then maybe we can move on to social recovery wallets. But just last question on on rollups. How does ETH2 kind of, just to tie this out, how does the ETH2 roadmap fit with the rollup roadmap?

• 1:25:46Ryan Sean Adams?

  I understand that ETH2 is going to provide a way to like, provide consensus on a sharded data layer, which is going to make more space, more sort of bandwidth, I guess, for for rollups in the future. What's that going to look like and what's that going to do for Ethereum's holistic scalability story here?

• 1:26:11Speaker 02

  Great question. It's a definitely very important to end a circle back and I guess answer this one. Basically, so we have this thing called the rollup centric roadmap, which basically says that now in the short term, we recognize that there is massive fee pressure and rollups are the only thing that can relieve the fee pressure, no matter what we do. And and at the same time, we recognize that for sharding, providing sharding of just data. So just having sharded blocks that just contain these blobs where, you know, you might have whatever data you want, but there's No kind of on-chain processing of it is an easier problem to solve than short than a shorted computation.

• 1:26:52Speaker 02

  And so if you take those two facts together, the thing that you realize is basically that, well, what's a rollups need? Rollups need data and what's the scalability limit of a rollup? The scalability limit of rollup is basically, well, how much data space is there that the chain has a consensus on? And with the current Ethereum chain, that limit is somewhere around 500 kilobytes a block. Uh, but with the sharded system, you basically have like 500 kilobytes for one uh, for each of these sixty four blocks in every slot. Right? So there's just going to be this much larger amount of a space and within that space, um, uh, you're just, uh,

• 1:27:32Speaker 02

  you know, you can use that to potentially go up to something like a hundred thousand transactions per second that just with our rollups, right? And I have some numbers. I definitely encourage people reading the post. It's also on vitalic.ca. And I talk about some of the tricks that we use for data compression and some of the math that shows like how many data, how many bytes you need for a transaction of different types and like how much uh, scaling gain you can get on a uh, on a regular rollup and or on a rollup on ETH one and then multiply that by another sixty four to get the scaling gains for rollups on ETH two. Uh, and so.

• 1:28:11Ryan Sean Adams?

  And just, just to clarify here, Vitalik, so um, this data, this sharded data layer, is this going to be available to use for rollups before the ETH one and ETH two merger?

• 1:28:26Speaker 02

  Um, it can be. There is work that needs to be done for that to happen. Basically, we need an ETH two like client inside of ETH one. And that technically requires like some EIPs on ETH one to be done, which I think are uh, in the pipeline, I believe for like soon after Berlin or something like that.

• 1:28:44Ryan Sean Adams?

  Got it. Cool. All right. Well, excellent. This has been a fantastic article. So of course, an incomplete guide to rollups. I didn't feel like that was incomplete. What about you, David? I felt I felt like that was a very complete guide to rollups.

• 1:28:58David Hoffman?

  Yeah.

• 1:28:59Ryan Sean Adams?

  At least for me.

• 1:29:00David Hoffman?

  Maybe that's a good question, Vitalik. What would a complete guide to rollups?

• 1:29:05Ryan Sean Adams?

  Yeah.

• 1:29:05Speaker 02

  Mention. One thing I say is that the guide is already wrong. So one of the tables, line four, general purpose EVM rollups are already close to mainnet. Well, as of now, the optimism rollup already is on mainnet, at least for Synthetix. So that's progress. And I think like, this is just a evolving technology and people are going to come up with, you know, new and more clever tricks. And like, I wrote this blog post with the goal of it being something that people can kind of go back to and just get their just primer on what the heck rollups are even for years into the future.

• 1:29:45Speaker 02

  So I expect there to be more and more things that end up just inevitably not being part of the post, but that continue improving rollup people's rollup users' experience.

• 1:29:59Ryan Sean Adams?

  Well, excellent. Well, thank you for that guide. All right. Let's let's flip to our third and last subject for today. This is all around the subject of social recovery wallet. So we were talking about scalability, I suppose, with with rollups. And, you know, a typical Ethereum user feels that pain when they pay for a $20 uniswap transaction, right? Another pain point that Ethereum users feel is around securing your private keys. And this is definitely a hindrance to to mainstream adoption. I think a lot of crypto ends up in exchanges just because people are uncertain. They don't feel like they have the tools or the competency to secure their own crypto.

• 1:30:45David Hoffman?

  And of course. Is like a rite of passage coming into this industry, which is definitely something that we should have a Band-Aid for.

• 1:30:52Ryan Sean Adams?

  Yeah, absolutely. You know, but and of course, you know, not your keys, not your big, not your crypto. As as our friend Andreas says, and certainly if you want to become bankless and go bankless, you can't keep your private keys inside of a crypto exchange. So right now, best practice is we have things like MetaMask, which is a an extension of the driver. If you want to be a bit more secure, you can use a hardware wallet. But Vitalik, you're presenting kind of this, maybe this third way, this idea of a social recovery wallet. So could you give us a quick synopsis on what a social recovery wallet is? And why it's important? Where do you want to start with this one?

• 1:31:36Speaker 02

  Sure. And I guess we can just start off with what the thing is. So if you scroll down to Ctrl F, social recovery is better. And then there's a diagram a bit further down.

• 1:31:52Speaker 02

  There we go. Yeah. So basically, the idea is that a social recovery wallet is a smart contract wallet. So you're if you use a social recovery wallet, your account is a smart contract, and your assets would be in that smart contract. And the smart contract has these rules that say that there is a signing key, and that signing key can be used to approve transactions. And then you have this concept of guardians, right? And the idea is that there's a set of some number of guardians, at least three. I recommend even going up to five or seven if you know enough crypto people. And of these guardians, a majority of them can cooperate to change the signing key of an account if you lose your signing key. So the goal of this is basically just account recovery, right?

• 1:32:36Speaker 02

  And account recovery is just something that everyone ends up needing from time to time. And

• 1:32:44Speaker 02

  It's something that like lots of services really don't do well, right? So like if you lose your Google or account, then I have to go through customer service. And often it's even just very hard to recover your account. And like I've known people who are just never able to do that. And in the case of crypto, of course, you know, if you just use a regular wallet, well, if you lose your password, you're screwed. And there's just so many examples of people who just lose access to their accounts and they end up being completely screwed. Whether they lose it because they forget a password or because like something they lose their computer

• 1:33:27Speaker 02

  and they just never had a backup anywhere or because they

• 1:33:35Speaker 02

  reinstall their operating system and they forget to copy over the files that happen to contain some of their keys. Like there's just a this kind of whole set of reasons or you know, their funds are on a paper wallet, but they forget the piece of paper, their funds are on a hardware wallet and something happens to that hardware wallet. There's just lots of reasons why you can lose your funds. And so social recovery basically says, well, you can identify, you can specify some set of guardians. And this could be institutions, this could be friends or family, this could even be just other devices owned by yourself. And the majority of these guardians has the ability to basically reset your key.

• 1:34:16Ryan Sean Adams?

  So this is a pretty simple idea, quite honestly, right? So you know, problem that we're solving is custody of private keys is hard and people can lose them. And if they lose them, it's a disaster, you lose your entire crypto. So solution is twofold. You have a smart contract based wallet and then you have this squishy meat space idea of guardians. And people who have a Google account are probably used to this. You know, there's a setting in your Gmail account where you can, you can set, you know, your spouse or a friend's email address to, to recover your password, right? This is a similar idea, only you're delegating that guardianship possibly to some, some, some other private keys.

• 1:34:57Ryan Sean Adams?

  And this could be, you know, friends and family, this could be other devices, that sort of thing. This feels very squishy though.

• 1:35:05Speaker 02

  Really importantly, not one of one, it's M of N, right?

• 1:35:08Ryan Sean Adams?

  Okay.

• 1:35:08Speaker 02

  So that's like, that's a huge difference between like, say Gmail's recover email feature.

• 1:35:13Ryan Sean Adams?

  Right, so it would be, it would be a set of guardians that would then, when they come together, their powers combined, they can restore, they can restore your wallet.

• 1:35:23Speaker 02

  Though interestingly enough, WeChat already does this, right? Like if you spin up and I, I, if you um just wants to log on to your account and like, you know, you don't have a password or you don't have some other authentication, then you can create the account and then what it does is it basically uh requires you to, like, it gives you some contacts, I think. I believe it's something like they just automatically chooses some contacts that you frequently interact with and it sends them a confirmation code and they have to give you the confirmation code. Or, you know, you have to give them the confirmation code and they have to like type it in a chat with you, I forget, it's one of those two.

• 1:36:04Speaker 02

  Uh, and so, like, basically, if you can, like, multiple of your frequent contacts um, like, type in these contribution codes, then you can access your account, right? So.

• 1:36:18Ryan Sean Adams?

  So two things I'd be worried about with this Vitalik, right? So um, the, the first is, okay, you said, y- you're essentially putting your private keys inside of a smart contract wallet, right? And there have been smart contract, now your private keys.

• 1:36:32Speaker 02

  Right, so this is basically saying that your, instead of your private keys controlling funds, your, the, the smart contract is controlling funds.

• 1:36:41Ryan Sean Adams?

  Ah, right, yes.

• 1:36:42Speaker 02

  Ability to replace your private keys if you lose your private.

• 1:36:45Ryan Sean Adams?

  I see, right, and that's a, that's an important distinction. How, however, um, there could be a bug in a smart contract wallet. Um, there, there could be an issue with that smart contract wallet. It introduces some additional code complexity in the process. So that's the first, you know, question I'd have for you, how can we get comfortable around that? Um, the second is, the, i- it does at first glance feel kind of squishy to um, you know, start trusting meatspace. Social relationships with this sort of thing like people are probably thinking as they as they're hearing you talk. Okay, who are the like five to seven people in my life that I I would actually trust with with with something like this?

• 1:37:28Ryan Sean Adams?

  And how much do I actually trust those relationships? Can you talk about both of those, I guess, security vectors?

• 1:37:37Speaker 02

  Right, so good, important question. So I think as far as like security of a smart contract wallets goes. One important thing to keep in mind is that I think that the security of the

• 1:37:54Speaker 02

  the code needed to implement this recovery mechanism is very small, right? It's maybe even just something like 10 lines of code. And the reason is that like you can already abstract out the multi sig part into a separate mechanism, right? And we've already had multi sig wallets that work for years. There's a the multi sig wallet that stores the $600 million or whatever it is of the Ethereum Foundation's money. There's the more recent Gnosse Safe Wallet that stores lots of projects money and it's been formally verified and audited many times. So that's been increasingly trusted by the community.

• 1:38:32Speaker 02

  And so the majority of the code is something that or like you can just delegate to a multi sig wallet and that's already been tested. And then the rest of it, like it is something that would need to be written and it is something that would need to be audited and verified, but it is a relatively small kind of 30 line of code job relatively speaking and not, you know, some really complicated thing. So that's one thing to answer or one. And the other thing to keep in mind is that like I'll talk about this a bit further down, but realistically, all of this stuff is going to happen inside of rollups. And I can even expect like a rollup projects to just like

• 1:39:16Speaker 02

  incorporate some form of multi sig or social recovery wallet just natively. And I think they should do that, like I think the move to rollups is a great time to start moving people onto these more secure paradigms. So. And that's one answer. And then in terms of like you, the question of like, do you trust your social relations? I have a paragraph a bit further down, right? Where I basically say that there's this really nice security thing that you can do, which is that your guardians, number one, they don't have to be publicly known. And number two, they don't even need to know each other's identities, right? So like you, for example,

• 1:39:55Speaker 02

  could use as your guardians or like, you know, your mom, if you work for a company, your boss, then some institution, some, you know, friend from high school and these can be like you want to use guardians from different social circles that you have, right? You want to have guardians that ideally do not even like know each or at the very least, don't closely talk to each other. And

• 1:40:25Speaker 02

  basically

• 1:40:27Speaker 02

  like the reason why this can be accomplished, right? Is because like either you don't need to publish guardians addresses on chain until you actually do a recovery, or even more securely, you can just have each guardian generate a new single work as address that they would use for each upper, well, for each wallet that they're guarding. So

• 1:40:49Speaker 02

  and, and I mentioned like it's recommended to choose a diverse collection of guardians from different social circles. One institutional guardian would be nice, though there are privacy reasons why you might not want to do that either. And like this, basically, it would just make it very hard for these different guardians to collude. Right? So like, for example, you know, like I know, like for you, Orion, right? Like if you become a guardian for David, then like, how the hell would you even start figuring out like who of David's other contacts are going to collude with to steal all his money?

• 1:41:23Ryan Sean Adams?

  That's a good question. I'm thinking about that now, Vitalik. Who, who, who indeed?

• 1:41:28Speaker 02

  Question one, do you even know? And question two, once you start poking around and asking, what's the probability that you're going to get up to four of seven before one of these people rats you out to David and David just like switches over his

• 1:41:42Speaker 02

  guardians to someone else that cuts off contact with you?

• 1:41:45Ryan Sean Adams?

  Yep, that's probably pretty accurate. And considering David and I have never met in real life, though we have spent hours upon hours in digital life together, means I don't actually know some of his IRL relationships and friends and family.

• 1:42:02David Hoffman?

  And it's gonna stay that way.

• 1:42:07Ryan Sean Adams?

  Yeah. Well, so Vitalik, do you think this kind of solves private key management? Or this could solve private key management, basically?

• 1:42:14Speaker 02

  I think it's the best solution that we have right now. And I think it would be great for the ecosystem if we can make a kind of a strong push toward implementing this kind of technology.

• 1:42:26Ryan Sean Adams?

  And we do have some of this today with Argent is one, definitely Bankless listeners will be familiar with. Loopring you mentioned is another. So there are attempts with it right now. And you mentioned, I think, earlier in our discussion that you tried to do a recovery with with Argent, just to sort of test that out. And it was like, pretty expensive. There's like a $50 gas fee associated with it. So maybe we could just tie this off with what you're talking about earlier is migration to Layer 2 and rollups can kind of solve the remaining challenges. So you said some rollup solutions might even be able to have to ship basically a social recovery wallet right out of the box, which would be super

• 1:43:08Ryan Sean Adams?

  cool. So it sounds like rollups have the capacity to innovate faster and try new things that the main chain really, really doesn't have that capability. But what did you, what did you have in mind about this intersection of synergy between Layer 2 and social recovery wallets?

• 1:43:27Speaker 02

  Yes. So there's, I think, a couple of problems that rollups solve at the same time. And so one of them is that Ethereum has this very subtle technical weakness, which is this kind of the fact that only externally owned accounts can initiate transactions. And that was just-

• 1:43:47David Hoffman?

  Sorry, could you define externally owned accounts for our listeners?

• 1:43:51Speaker 02

  Yes. It is an account which is controlled by a private key. The, if an account that's not an external account, it's a smart contract.

• 1:43:59David Hoffman?

  So there's only two types of accounts. There's accounts that addresses with private keys, and then there are addresses that are smart contracts.

• 1:44:06Speaker 02

  Correct. Cool. So, and only EOAs can initiate transactions. There's no ways to initiate a transaction from a smart contract. So, this creates problems, right? And like, actually, I know, have either of you used the tornado cash before?

• 1:44:22David Hoffman?

  I have.

• 1:44:23Speaker 02

  Yes. Okay. So you remember how when you do a withdrawal from tornado cash, you have to select a relayer, right? And you're not signing a transaction. You're like signing a message and then, or actually, I think you're not, or even signing the message. You're just like providing the note and someone else sends the transaction, right? Like, so the reason why that happens is because in what what's happening in a tornado cash withdrawal is that you're trying to withdraw money in zero knowledge to a completely new address. And so you do not already have funds in that address. So you have no way of paying the transaction fees from an EOA. And the money you're trying to withdraw is coming from a contract.

• 1:45:04Speaker 02

  And so the transaction has to start from some EOA and that EOA has to be provided by a third party, right? And the relayer is that third party is just do this as a service in exchange for a fee. Now, this is inefficient and it added significant complexity to tornado cash. And it's all it also adds significant complexity to smart contract wallets. I think it might be the biggest UX barrier that smart contract wallets have and the a big reason we don't have more of them. Is so like our gents, like they basically run their own relay, right? And you know, looping, well, they're a roll up. So they're in a part of this, the solution here. And I got, I'm definitely hoping that our gents is gonna start doing things with roll up soon.

• 1:45:48Speaker 02

  But if you have a, any of these wallets, that's a smart contract that's not on layer two, then either you need a relayer or you need this kind of somewhat bulky scheme where you need an account that has most of your assets. And then an account that has the rest of your assets to pay fees. And that account has to have quite a bit of ease, just in case transaction fees get very high and so it gets annoying. So there's two ways of solving this problem. One of them is a kind of decent decentralized general purpose relayer network. And the gas station network is doing a great job of this. But the other thing is that you can just move to roll ups and roll ups can just have better support

• 1:46:30Speaker 02

  for just allowing transactions to start from smart contracts directly. So that's the first problem. And then the second problem is the high transaction fees, right? Like you can't have, you know, roll up recoveries cost $50, but you know, in a layer two system, if everything is done inside of a layer two recoveries could potentially only cost a few cents. So like in general, like I think the move to layer two is this great opportunity to just do lots of things in a way that's just much better than we what we've been doing before. Smart contracts by default are a great example of this. Optimism have already

• 1:47:10Speaker 02

  kind of taken some steps in this direction, which is a nice, like I think every account in optimism is by default, a like simple smart contract wallet that can be that the user, if they want to, can replace with a different one. So yeah, again, there's an excellent synergy between layer twos and better security.

• 1:47:36David Hoffman?

  So, oh, sorry, go ahead.

• 1:47:38Speaker 02

  I just wanted to say, I just, I do also want to at some point circle back to kind of the relationship between social recovery and crypto values.

• 1:47:47David Hoffman?

  Maybe we should, that's where we can tie this conversation off. But, but before we get there, I do want to ask, does that, does that mean that you're, you believe that the trend for the average individual who engages with Ethereum is going to move towards layer two smart contract wallets?

• 1:48:02Speaker 02

  Yes.

• 1:48:04David Hoffman?

  Interesting, interesting. And people will just perhaps be able to execute L1 transactions from their layer two smart contract wallet by proxy. So like they'll, they'll make a transaction with their smart contract wallet. And if they want something to happen on chain, on the Ethereum L1, it can be initiated from that point. Interesting.

• 1:48:23Speaker 02

  Right. Well, so, so we have to distinguish between like layer one smart, like smart contract wallets that are on layer one versus smart contract wallets that are inside of rollups, right? So like, I think smart contract wallets are better either way, but like they're definitely much better inside of rollups. And I definitely expect more and more people to be kind of over time to move toward being inside rollups natively. So just be able to do lots of things and just like.

• 1:48:52Speaker 02

  Do all of the Ethereum thing that they wants to do just by like floating between, you know, optimal, Simon, arbitrum, and ZK, and Loopring. And I think we're going to have better and better techniques for moving between those systems without having to hop hop onto the main chain first. But and that will also reduce transaction fees massively, which will give an opportunity for this social recovery stuff to happen better.

• 1:49:16Ryan Sean Adams?

  David, our kids, our kids may not even use the main chain. That's what Vitalik's saying, right? Like, they might live their whole DeFi Ethereum life on a layer two chain completely.

• 1:49:28David Hoffman?

  So well, that kind of begs the question, say, I have a smart contract wallet on the L2 and I'm and I'm there because of just the all the UX benefits that it provides me. And I want to swap tokens for one token for another because of whatever reasons that people do that. And the Uniswap L1 is perhaps not necessary because on Loopring, there is another AMM that because I'm perhaps I'm on the Loopring and L2, I just use that exchange feature there instead. So then at that point, what does the if if all the economic activity is kind of put into L2s, what does the L1 do? Like, what kind of economic activity would you expect to see on the main Ethereum L1 if that becomes the case?

• 1:50:13Speaker 02

  In the short to medium term, I expect like high value users to stay on L1 just because they can afford to pay the fees and that they get like the fees are a lower cost than the the risk that people perceive of L2 is breaking. But, you know, in the longer term, the risk of L2 breaking is going to subside. And in which case, L1s are mainly going to consist of like layer two is publishing these batches and batches and proofs and like users moving between rollups and some in some cases.

• 1:50:47David Hoffman?

  That's extremely interesting. That kind of makes my head turn to the whole scaling metaphor of Xbox games where people or Xbox games when the Xbox first came out were like kind of the graphics were rudimentary, the very basic, but then Xbox games towards the end of the Xbox lifecycle, and I'm specifically talking about the Xbox 360 here, like the big Xbox that took off the most amount of time, games towards the end of the Xbox 360 lifestyle were far more efficient, far more graphically like beautiful and complex and rich, but yet it was the same hardware. It was the same hardware all through and through. And that seems to be kind of how what you are alluding to with the Ethereum L1 over time is that

• 1:51:29David Hoffman?

  we are actually just making better use of the same computational capacity that Ethereum offers. Is that kind of where you're getting at?

• 1:51:39David Hoffman?

  And then my other question is, Ethereum, of course, is a place of Legos. We have different things, different applications that we can plug into each other. What we're talking about here is the Lego between a smart contract wallet and an L2, talking about the efficiencies and UX benefits that we get there. What about the Lego of decentralized identity? How does the combination of decentralized identity and smart contract wallets, how do those things interact?

• 1:52:06Speaker 02

  Hmm, I guess, I know, good question. I've talked about identity in a lot of different contexts. I guess the question is like, there's different kinds of identity, right? Like there's identity of like you just authenticating yourself as being the same actor who did some other interaction previously, which is just like maintaining a persistent account. There's identity as in proving things about who you are in the real world. There is identity as in kind of the unique human problem, creating accounts that like each person can only have one of. And like, those are all, they are kind of different primitives that have somewhat

• 1:52:44Speaker 02

  different properties. So I view like social recovery wallets as being like in a big step forward for the first kind of identity, this kind of maintaining some kind of like persistence thing that you can represent yourself to as to like services and other people. So.

• 1:53:10Speaker 02

  Like and as I mentioned before, this is something that like could potentially end up kind of going like even being used for just centralized web two services, right? Like right now, if you log into many services, a lot of the time you're logging in with to group with Google or you're logging in with Twitter or logging in with Facebook. And like you're basically using an identity that's controlled by Google or Twitter or Facebook. As the mech mechanism by which you interact with all of these services. I'm a but here. Like the thing that I think could eventually happen is people using blockchain social recovery wallets.

• 1:53:49Speaker 02

  Or wallets with like some kind of other recovery mechanism of their choice as that identity, right? It's like ultimately. If we can create something that's like as secure in terms of like anti theft and anti loss properties as centralized services provide, which I think we can, because I think people overrate how good these centralized services are anyway. Then we can create something that makes sense for even people to use to just interact with all of these other things too. And so I mean, I guess, yes, you know, this stuff is a a strong path towards solving at least like one of the problems that we that we put in the identity bucket.

• 1:54:30Ryan Sean Adams?

  So Vitalik, thanks. Thanks so much for guiding us through social recovery. Let's let's tie up the discussion with this critique maybe address the person who's thinking, well, you you just introduced something that I thought blockchain was was going to remove. This idea of trusting people, right? Now we're back to trusting people again, Vitalik. That feels like a betrayal. What's your response to that critique?

• 1:54:57Speaker 02

  Right. So I think this kind of comes like really ties into kind of this difference in perspectives about what I mean, crypto is for and like the kind of ideology and vision that different projects have. And I've always interpreted Ethereum as, you know, not being about this kind of mountain man.

• 1:55:19Speaker 02

  Going to do everything myself mentality. It's more about this idea that, you know, we're going to use like cryptography and economic building blocks like, you know, ETH as the monetary layer and general purpose code and the ability to write these contracts that can control things. And these tools are basically going to empower people to and give them a choice in creating mechanisms, right? And they can empower people to give choice in like whom to trust, also giving, creating constrained forms of trust that basically say, I trust you to do some things, but I don't trust you to do everything.

• 1:56:00Speaker 02

  And this is something that I think like we've been seeing in Ethereum more broadly. And it's like this big kind of design philosophy, right? That like, it's not about trying to eliminate trust completely. It's about basically saying, well, we have these technological tools and we can create systems that have these much laurels of trust. And we're going to create, but where trust is still this important ingredient, but we just use it in ways that's, that's, that are kind of much more clever. And we also just like, right? So one minimize it, two, try to use it, try to use it more intelligently.

• 1:56:45Speaker 02

  And three, as much as possible, give people a choice of like what basically, what trade offs they take. Like this is something that like Ethereum is like move, moving, doing on the blockchain layer as well, right? Like there's this discussion around proof of stake and weak subjectivity and how proof of stake makes this trade off that, you know, if you're logging on to the network for the first time, or if you've been online for like a very long number of months, then like you do have to kind of get your view of which chain to follow from somewhere. And but the thing that you get in exchange for this is just this vastly more efficient blockchain with a much less resource consumption.

• 1:57:27Speaker 02

  Right? And I think here at the same, like it's also this very similar principle, right? Like it's basically saying that, you know, we're. Going to be moderate, but we're also going to say that just this is this like this is this playground for just building different ways for people to interact with each other. And so like, let's just actually use it and let's just build really interesting things with it.

• 1:57:57David Hoffman?

  Well, Vitalik, I want to thank you for being so generous with your time and coming on the program and talking about all these various subjects with us. I know that like historically in the in the past, you had put out a blog post and then people would kind of become woke to it like one or two years later as like, oh, like we finally integrated what Vitalik was talking about, you know, two years ago. And I actually hope, I think that I see that there's actually a faster iteration cycle between some of the things that are coming out on your blogs and some of the development that we're actually seeing out in the world of Ethereum and the greater world of crypto. I hope that actually some of these conversations that we're putting out on the bankless program are are helping with speed up speeding up that iteration cycle. But anyways, I do totally

• 1:58:40David Hoffman?

  agree with you that the the future of 2020 and maybe 2021 or that the future of 2021 and beyond is very dominant in the world of, you know, very strong sexy UX of smart contract wallets as well as the integration of, you know, the ease of L2s and and all the other things that you have written on your blog post. So thank you for coming on and sharing those ideas with us.

• 1:59:02Speaker 02

  Happy to be here.

• 1:59:04Ryan Sean Adams?

  All right, guys, as always, want to end with this. None of this was financial advice, of course. Ether is risky. So is DeFi. So is crypto. You could lose what you put in, but we are headed west. This is the frontier. It's not for everyone, but we're glad you're with us on the bankless journey. Thanks a lot.